Don't end up overpaying or facing a big bill: How to untangle your tax code

Every spring a letter lands from HMRC that most of us stuff into a drawer with barely a second glance. Yet this could cost you hundreds of pounds over the year - or leave you open to a nasty bill in the future.

This correspondence - your Coding Notice - is vitally important because it sets out how much you will be taxed through the year. And you, not HMRC, are responsible if it is wrong.

Your tax code will be passed to your employer or pension scheme, telling them how much tax they should deduct.
If it is wrong, then they’ll be taking too much tax from your salary or pension. Or you could be paying too little - and then you’ll receive an unwelcome bill later.

In a tangle: Are you confused about your tax code?

If you have more than one job or pension, then you should be given more than one code so you are taxed correctly by each.

Coding Notices are far clearer than they used to be but it can still feel as though you are fumbling through alphabetti spaghetti. The key is to get on top of what it all means.

Your tax code will be made up of numbers and one or two letters. If you know what the numbers and letters mean, you have less chance of paying the wrong amount of tax.
So, let’s get started and put an end to the confusion.

GETTING HELP

If you have a straightforward question about filling in your tax return or you just want a bit of guidance, try HMRC’s helpline on 0300 200 3300 - but be prepared to be put on hold for a while.

You can also write to the address on your Coding Notice or, if you don’t have recent letters from them, write to: HMRC, Paye As You Earn, PO Box 1970, Liverpool L75 1WX. But again be prepared to wait because there is often a large backlog of letters.

For more complex help, you might choose to use an accountant. Make sure you talk through what they will do for you and how much they will charge. Check whether or not the fee you are quoted includes VAT, which could add 20 per cent to the price.

If you’re filing online, beware of copycat websites or those that offer to file on your behalf.

Some of these charge several hundreds pounds for doing nothing more than you could do yourself.

In fact, some do nothing other than charge you a fee. If the web address does not start hmrc.gov.uk or www.gov.uk you have gone to the wrong place.

What the numbers on your code mean...

The first three numbers on your tax code indicate how much income you can have in the tax year (April 6 to April 5) before you must pay tax.
To get the actual amount, just add a zero. So if your code is 944L, you can receive £9,440 before you start paying tax.

Remember, most people should start out with £9,440 this tax year, and £10,000 for the tax year starting on April 6.
Those born before April 6, 1948, will have £10,500, while those born before April 6 1938 get £10,660.

Be aware that if your personal allowance is low, it will have a knock-on effect on the rest of your tax.
For example, someone with the full personal allowance of £9,440 would start to pay 40 per cent tax on earnings over £41,450 a year. But if their personal allowance were reduced to £7,440, they would pay higher rate tax on earnings over £39,450 a year.

And what the letters mean...

BR: This simply means basic rate. If you have this code you will have no personal allowance, so every penny of income will be taxed at a minimum of 20 per cent.
You’re likely to have this code if you have more than one source of income. For instance, if you work and have a pension then you may have a normal code on your job and a BR code on your pension.

D0: All of your income will be taxed at the higher rate. You have been given no personal allowance and no 20 per cent tax band.
This is likely to be because you have more than one source of income. Perhaps you have two jobs. Your main job will be given a normal tax code and, if HMRC thinks you will be a higher-rate taxpayer, the second will be given a DO code.

D1: If you’re given a D1 code, you’re either very fortunate or there has been a serious mistake. This code is reserved for those with an income of more than £150,000 a year who have a second job or a pension.

K: The code no one wants. It means that you have so many taxable benefits and other deductions that they outweigh your allowances. You might get one of these if you are a higher earner with an expensive company car.

L: You’re Mr or Ms Ordinary. You were born after April 5, 1948, and you receive the basic personal allowance, which is a maximum of £9,440 this tax year.

NT: The best code of all. No tax will be taken from your income or pension.

P:This is for pensioners born between April 6, 1938, and April 5, 1948. You will have a maximum personal allowance of £10,500 this tax year.

0T: Watch out for this one. It is likely to be used if you’ve started a new job and don’t have a P45 showing your earnings and tax paid at your previous job. It assumes all your tax allowances have been used up - with the result that all your income will be taxed, most likely at the basic rate.

T: This is used when there are other items that need to be reviewed in your tax code. The ‘T’ used to mean temporary - though HMRC backs away from that definition now.

Y: This is given to older pensioners born before April 6, 1938. This should indicate a personal allowance of up to £10,660 this tax year.

FOUR FAB WORK PERKS

Cycle to work: The scheme lets you buy a bicycle more cheaply

GET DISCOUNTED TRAVEL If you have an expensive commute, you could get a tax-free loan to buy a season ticket. The limit for employers providing tax-free loans doubles next month from £5,000 to £10,000. Ask your employer if they offer them. If not, suggest it as a new perk.

CLAIM REBATES FOR WORK UNIFORM Wear a uniform to work? If it’s your job to wash, repair or replace an outfit — from basic T-shirts adorned with company logo to full kit if you’re a carer, nurse or police officer — you could reclaim overpaid tax from the past four years.

A standard allowance for uniform maintenance is £60 (for the 2013/14 tax year), so basic rate taxpayers can claim back £12 (20 per cent of £60).

Most people can claim for the four previous years if you’ve worn the uniform all this time - so a basic rate taxpayer could reclaim £60 in total.Write to HMRC, Pay As You Earn, PO Box 1970, Liverpool L75 1WX. Mark your envelope ‘Repayment Claim’.

BUY A BIKE FOR LESSA cycle-to-work scheme lets you buy a bicycle more cheaply. Under what’s called a salary sacrifice scheme, your company buys the bike and then lets you repay from your gross monthly salary - typically over 12 months. It means you save on income tax and National Insurance.For companies, it’s an easy perk to introduce. Go to cyclescheme.co.uk or bikehub.co.uk.

CHEAPER CHILDCAREMany employers offer vouchers to cut the cost of childcare — also through salary sacrifice. Again, it means you pay less because there’s no income tax or NIC to pay.Basic-rate taxpayers can pay for up to £243 of childcare with vouchers each month. This sum is allowed per parent, so two parents could grab £486 of vouchers each month.

What can push up my allowance?

Here’s how you can keep more of your income out of the taxman’s hands.

Pension contributions

Basic rate tax relief is added to personal pension contributions automatically, but higher-rate tax payers get some extra.
So, if you’re a higher-rate taxpayer and contribute to a personal pension that your employer does not take account of, then HMRC may increase your personal allowance to give you the extra 20 per cent tax relief that you are entitled to.

Be aware that if you paid £6,000 into a personal pension in one tax year, then HMRC may assume you will pay the same in the next year - so you receive the benefit as you go along, rather than having to wait until you fill in your tax return.
If you don’t intend to make the same contribution this year, then let HMRC know or you could pay too little tax - and end up with a bill later.

Married couples allowance

If you’re married or in a civil partnership and one of you was born before April 6, 1935, you’re entitled to a married couples allowance.
This is given at a rate of 10per cent - but involves a complex calculation on your coding, so it can look as though you have been given extra allowance and then had some taken away.

The allowance should cut your tax bill by between £304 and £791.50.
For those who married before December 5, 2005, the allowance is applied to the husband’s tax code, but since then it has been applied to the partner with the higher income.
However, it is possible to transfer it to the other partner.

Other tax allowances

Your tax code could be increased to give more tax-free income if you receive the Blind Persons Allowance, pay professional subscriptions or have flat-rate job expenses.
The latter is given on specialist clothing, a uniform or on tools that are essential for your work.

What can push down my allowance?

CHILD BENEFITS TAX TRAP

Thousands
of parents face fines for failing to register that they have received
child benefit — so make sure you’re not one of them.Huge
changes ushered in last year mean any parent earning more than £50,000
sees their entitlement to child benefit cut. And if you or your partner
has an individual income of more than £60,000, the benefit is removed
altogether.

But if you or
your partner earn more than the threshold and want to keep on receiving
child benefit, you must pay a tax charge called the high income child
benefit charge.

It means handing back some or all of the money via a self- assessment tax return.The tax is tapered, so the more you or your partner earn above £50,000, the greater the tax charge. It amounts to 1 per cent of the child benefit paid for every £100 of income between £50,000 and £60,000.

If
your income is £56,000 and you have one child, you will be entitled to
£20.50 a week — so £1,066 for the year. So you must pay tax of 1 per cent for every £100 over £50,000 — in this case, 60 per cent of your benefit: £639.60.

Make
sure you file your self-assessment tax form on time. Tens of thousands
were fined £100 in January after missing the deadline.

Any benefits in kind provided by your company that are in addition to your salary - a company car, for instance, or private medical insurance - mean you will have to pay extra tax.

These and other taxable benefits from your employer should be listed on your Coding Notice - and their value will be deducted from your personal allowance to reduce it.
Check these are correct, especially if you have changed car recently. HMRC, Whatcar and car industry analysts Parkers are among those with online calculators to help.

State pension and benefits

The state pension is taxable. HMRC deals with this by adjusting your tax code.
Someone on the full basic state pension will have £5,727 deducted from their personal allowance to allow for this. This should reduce your personal allowance to around £4,773 and your code to 477.

Some benefits are also taxable. These include taxable incapacity benefit, taxable employment and support allowance and estimated jobseeker’s allowance.

Other pensions

If you have another pension that does not automatically have the tax taken off, then your tax code will be reduced to make sure you pay tax on the income. This is most likely to happen if you have an annuity payment.

Savings interest

Banks and building societies take 20 per cent tax from the interest of most savings accounts. Higher-rate taxpayers must pay extra to make up the difference to their 40 per cent rate.
HMRC may make an assumption of how much tax you should pay and deduct this from your personal allowance. Check this carefully or you could pay too much tax.

Adjustment to the 20 per cent band

Look out for this one if you’ve got more than one job or pension and pay basic rate tax on both.
HMRC will add the income from all of them - and if this pushes you into the higher-rate tax band then it will take away some of your 20 per cent band to make sure that you pay enough tax.

Other

There is a long list of other things that could reduce your tax code. These include unpaid tax that must be collected and any outstanding debts you may have with HMRC.
One very nasty one is a Gift Aid adjustment if you have made a charitable donation using Gift Aid, but have not paid enough higher-rate tax to cover it.

Who needs to file a tax return?

Tax return: Do you need to file yours?

If your tax affairs are straightforward, then they should be handled by HMRC and your employer. This makes things very easy for the vast majority of workers.

Even if you don’t have to fill in a tax return, you should still check your Coding Notice each year to make sure it is correct.

More than ten million people do need to fill in a tax return - including the self-employed, company directors, anyone with an income of more than £100,000 a year and trustees.

You may also need to fill in a tax return if you receive substantial income from savings or property.

The trigger levels are: £10,000 or more income from taxed savings and investments (you can ignore income from Isas); £2,500 or more from untaxed savings or investments (again, Isas don’t count); £10,000 from property before expenses or £2,500 after allowable expenses.

Another group to fall into this net are those with an income of more than £50,000 if they or their partner still receive child benefit.

TAX DEADLINES, PENALTIES & FINES

TAX DEADLINES

October 31: The deadline for filing a paper return.December 31: The deadline for online returns if you want HMRC to collect tax due through your tax code.January 31: The deadline for filing an online return and for paying any tax due from the previous year. Self-employed people may also have to make a payment on account of roughly half the tax HMRC thinks they may need to pay for the year.July 31: You may have to make a payment on account covering the second half of what HMRC believes it will be owed.

PENALTIES

1 day late: File your return on February 1 or later and you’ll get a £100 fine.3 months late: £10 fine for every additional day late, to a maximum of £900 after 90 days.6 months late: A further fine of £300 or 5 per cent of the tax due.12 months late: A further £300, or 5 per cent of the tax due. In serious cases, you may be fined up to 100 per cent of the tax due.

LATE TAX FINES

30 days: 5 per cemt of the tax you owe6 months: A further 5 per cent12 months: Another 5 per cent